We have heard it for some time now: the market is divine, lending its magical corrective qualities to sort out the good from the bad. A character portrait of George Bush by a former teacher of his, Professor Yoshi Tsurumi (March 1, 2004), recalled a pupil's suspicion of such monitoring bodies as the Federal Trade Commission and Securities Exchange Commission. These bodies were “unnecessary hindrances to ‘free market competition’”. The New Deal received characteristic opprobrium - it was “socialism”. As for poverty: it was the simple result of a poor work ethic.
Someone supposedly more qualified to assess the levers of the market, Alan Greenspan, added a few pointers to this bald-faced view of market forces. In the late 1990s, when the hedge fund Long-Term Capital Management was registering losses in the billions, Greenspan, as Federal Reserve chairman, attempted to initiate a rescue package that would still keep the free marketeers happy. After all, the economy would, in time, re-order itself.
But not even Greenspan was willing to let things float. As he put it in his testimony to the House Committee on Banking and Financial Services (October 1, 1998), the Federal Reserve had taken some measures to facilitate “private-sector refinancing” of LTCM. With characteristic opaqueness, he argued that the Reserve's measures “were designed solely to enhance the probability of an orderly private-sector readjustment, not to dictate the path that adjustment would take.” Despite some tinkering, free-market orthodoxy would remain.
As Professor of political economy at Harvard, Benjamin M. Friedman notes (New York Review of Books, March 20) various attempts at regulating heated economic activity in this decade were rebuffed. The US Treasury suggestion in 2001 that subprime lenders subject themselves to monitoring, with a “best practices” code, and the Department of Housing and Urban Developments attempt to control real estate transactions, all came to nought.
A suspicion of regulating agencies on the part of the Bush administration (by no means the only one) and a system of buccaneering capitalism has led to one sad truth: the private sector is inviolable when it produces; and a needy cripple when it doesn't. When it performs, there is a rush to praise executives and line their wallets - they made the right decisions, and did the company good. Company profits are a result of business acumen, the genius of market capitalism.
When the company fails, we must all fail with it. Corporate success is the success of the few; corporate failure, a collective one. This is the underlying message of salvaging measures by governments and their regulatory bodies. The global subprime crisis has triggered bailout strategies across several countries. This suggests a grand admission: the market is not magical in its self-corrective wisdom, and its harmful effects must be neutralised.
The list of free market apostates is growing. Governments, after peddling the wonders of robust competition, are now viewing it with fear, even panic. Previously feted market ideologues are either shedding their skin or going into hiding.
Consider the most recent example of apostasy: the Federal Reserve's actions regarding Bear Stearns. With the demise of the mortgage securities specialist, Ben S. Bernanke and his fellow governors decided to ditch the policy of non-interventionism. Bloomberg correspondent Craig Torres provided a précis of the action: treasury notes would effectively be swapped for “privately issued mortgage-backed securities held by Wall Street firms” (March 15). Willem Buiter, economics professor at the London School of economics shuddered at the policy shift. This was “socialism for the rich, which is both inefficient and morally objectionable”.
The Reserve had become creditors of the otherwise doomed enterprise. In the words of Vincent Reinhart, former director of the Division of Monetary Affairs, such actions were “re-drawing … the relationship of the Federal reserve with the rest of the financial system” (March 15).
In Britain, Gordon Brown, with Chancellor Alistair Darling at the helm of the Exchequer, took a pseudo-socialist path An ailing Northern Rock, the Newcastle-based lender, has been, for all intents and purposes, nationalised. Offers by such giants as Virgin were dismissed as providing insufficient “value for money to the taxpayer” (BBC News, February 17).
Darling attempted to minimise the significance of the move, hoping to hide the British government's new love for market control. “The bank will be run at arm's length and on a commercial basis.” With inverted logic, the protection of Northern Rock has now become a collective duty - tax payers are to foot the bill of failed private speculations because it's in their best interest to do so.
Some banks on the continent have faced similar problems, with now familar government responses. The German banking system suffered the jitters last summer when IKB Deutsche Industriebank fell on the sword of American subprime speculation. A third bailout of the dying beast was assured in February this year by German finance minister, Peer Steinbrück. While private banks were expected to foot some of the bill, the government would provide two-thirds of the US$2.2 billion. The list of bank welfare recipients continues to grow.
The consequences of such bailouts are gradually coming to the fore. The Federal Reserve is finding its resources depleted. Numerous governments, despite a previously pathological aversion to regulation, are suddenly nervous by unfettered competition. While the Free Market deity is far from dead, it is expiring.
Greenspan, amid the economic carnage, is unrepentant. Writing in his memoir The Age of Turbulence, he argues that “the benefits of broadened home ownership are worth the risk”. Given the current crisis, with a shrinking base of homeowners, Greenspan may have been a little too optimistic. For that, we are left with a socialism tailored for the wealthy.